What Down Payment is Right for You
I remember buying my first house. My goal was to save as much a down payment as I could.
I first paid off all my debts and then I started to save like crazy. Things went well and I made great progress. Before long I had a substantial sum of money saved and I was motivated to keep on going. Seeing my money grow kept me motivated. This helped me establish great money habits which are essential before owning a home.
What I did not understand at the time was that my savings rate was directly connected to my disposable income. I was young, just started my air force career and I wanted to do stuff and explore this great world of ours. So, my disposable was limited to say the least.
I also did not take into consideration the growth rate of the real estate market. Was my savings rate keeping up with the growth rate of the market? In other words, if the market was growing at 8% per year, my savings needed to grow by at least 8% or I would fall behind the market. No one explained this to me and I eventually became frustrated.
Maybe you can learn from my ignorance and mistakes. Here is what I would do if I would had to do it all again:
- I would meet with a trustworthy mortgage broker who loves to educate people. Wise up about mortgages and then take this information and prepare a budget. Your budget will tell you how much you can afford monthly. Your budget is also the instrument that will tell you how much disposable income you will have.
- Meet with a great and trustworthy realtor (we can refer the best to you) and ask about the market. Don’t try to buy your dream home right away. Buy inside your budget, if not below budget so that you can be sure you won’t be house poor.
- Ask your realtor for growth rates for properties in your price range in the area that you would like to purchase a home.
- Keep your finances top of mind with great materials like books, podcasts etc. This will keep you motivated. You will need the motivation when all your friends want to go partying, but you want to buy a house. A great read for this is “Total Money Makeover” by Dave Ramsey. After all, it is Dave Ramsey that said “If you choose to live like no one else today, then one day you will live like no one else”.
- Start Saving! You are on your way to owning a home and being ahead of your partying friends.
A few facts to consider when it comes to how much of a down payment you should save. First let’s make a few assumptions:
- You want to purchase a home for $450,000.
- The growth rate of the market is 8% per year.
To buy this home in 2016 you would need a minimum down payment of 5% ($22,500) and closing costs of approximately $8,900 (excluding any first time home owner rebates). This means you would need at least $31,400. Your monthly payment would be $1,981/m.
Now that you know this, consider the following:
- You need to increase your down payment by at least 8% per year. This equates to $1,800 per year, which is not much at all.
- However, after one year that home would now be worth $486,000 (8% higher than last year) and to make sure you keep your mortgage payment the same as it is today, you would need a down payment of more than $58,000. This is more than double the amount compared to today and you would need to save $33,000 the next year to keep your affordability the same. This is not easy to achieve.
- If you kept your down payment at 5%, at the new increased price your monthly payment would be $2,140.34. This is almost $160/m more than what you would pay today.
As you can see, saving for a down payment is not hard. When you take all the facts into consideration, make sure you don’t go one step forward and two steps back while saving for your down payment. Maybe you need to purchase a home right away if all your other financial affairs are in order. If not now, make sure you have a great, achievable plan so you can meet your goals.
Meet with us, we will provide you the information and tools that you need to make a decision about your next steps. Your story is our story.